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Ombudsman's Office
Why does Korea focus on
notification-based FDI?
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       Growth planning or indicator targeting used to be practiced only in the socialist countries, but this is no longer the case. Many market-driven developing economies are adopting the indicative planning system in which the target growth rates are adjusted according to changes in the market conditions.
       Indicator targeting is commonplace almost everywhere. Inflation targeting is a good example. Inflation targeting is a monetary regime in which the central bank has an explicit target inflation rate for the medium term and announces this inflation rate to the public. The purpose of the central bank’s inflation targeting is to maintain price stability by changing the interest rates or monetary aggregates. In the early 1990s, three countries, New Zealand, Canada and the United Kingdom, implemented fully-fledged inflation targeting. Thereafter many other countries with high inflation followed suit.
       In a similar vein, many countries implement FDI targeting. Their government places a very high priority in attracting FDI and they believe FDI attraction is the shortcut to high growth and fast industrialization.They offer various attractive incentives to potential foreign investors and set the target FDI to expedite the attraction of


  • foreign direct investments. They are using two indicators— notification-based FDI (NBF) and arrival-based FDI (ABF).
       The NBF refers to the amount of investment that the foreign investor plans to bring to the host country. They notify their investment plan to the relevant ministry in advance. For Korea, the relevant ministry is the Ministry of Trade, Industry, and Energy (MOTIE). The ABF refers to the actual amount of investment the foreign investor has brought in. So as of end of the year, the two indicators do not exactly coincide with each other.
       Nevertheless, these two indicators are equally important and the MOTIE carefully monitors the notified amount and actual amount. Usually the actual amount tends to fall short of the notified amount for many reasons. First of all, the investors do not bring in the full investment amount at once from the beginning. They usually go through different stages of investment, which includes acquiring their business office and residence, making contracts for purchasing land and constructing factories and bringing in equipment. It takes a while for them to go through each stage.
       During the process of investment, investors run into unexpected problems in the host country. They can encounter difficulty in financing their investment in the home country. Also, if investors decide that their future market is not promising, they will cut their investment. For these reasons, the gap between the intended amount and actual amount will always exist.
       However, some critics point out that the MOTIE is too focused on attaining notification-based FDI. They point to international organizations such as the UNCTAD, which publishes the FDI statistics of its member countries on the basis of arrivals. They argue that the notification-based FDI indicator


  • should be dropped because it may distort the true situation. Unfortunately, however, this argument lacks credibility.
       These critics have failed to understand that the objective of focusing on the NBF in Korea is much different than that of the UNCTAD publishing ABF figures. The Korean government needs to know the ABF in advance for policy purposes. The government has to secure the upper ceiling of the budget to support the foreign investors in advance. Also with the information of the FDI target on a notification basis, the government can project the effects of FDI on growth, exports and employment in advance. In contrast, the UNCTAD’s main objective is to provide the information of the actual amount of FDI for member countries ex post. This information is useful for comparing FDIs by country.
       From the standpoint of the government of any country, it needs to monitor two indicators all the time to make their FDI policy successful. It is not the matter of selecting one indicator over the other

    By Dr. Jeffrey I. Kim
    Foreign Investment Ombudsman
    jeffikim@kotra.or.kr

    Who is the Ombudsman?

       The Foreign Investment Ombudsman and his grievance resolution body collect and analyze information concerning problems facing foreign firms, request cooperation from relevant government agencies, propose new policies investment promotion system and carry out other necessary tasks to assist foreign-invested companies in resolving their grievances.



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